20k per month?

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Mar 28, 2009 6:11 pm

Client is mid-40s, very little savings but just starting to make serious money. Can invest 20 or maybe even 30k per month. Not qualified money; his company doesn't have a retirement plan. He is in international sales. Probably striking out on his own next year to form his own company and we can look at a defined benefit plan then. This is retirement horizon timeline, probably 15 years out. Taxes now a huge issue.
What would you show him?

Mar 28, 2009 6:42 pm

Index annuity. 

Mar 28, 2009 9:42 pm

life insurance retirement plan.

Mar 28, 2009 10:49 pm

HLV of Whole Life with disability waiver of premium  (HLV = Human Life Value)

Disability with MAXIMUM coverage
Long Term Care with Cash Indemnity Rider
Fixed or EIA
Municipal bond funds
Mar 29, 2009 10:15 am
iceco1d:

Is he a W-2 employee?  Or is he a 1099 independent contractor for this company?



W-2.

Mar 29, 2009 10:47 am
Ominous:

HLV of Whole Life with disability waiver of premium  (HLV = Human Life Value)

Disability with MAXIMUM coverage
Long Term Care with Cash Indemnity Rider
Fixed or EIA
Municipal bond funds

 
I would add "6 months of his income in a money market fund".  Otherwise, this is perfect.
Mar 29, 2009 1:57 pm

Anyone else see a 401k opportunity at the employer?  If this guy is pulling down this kind of change, a tax deferred plan at work would be worth exploring.  I would ask for an intro to the owner or head of human resources.

Mar 29, 2009 3:20 pm
iceco1d:
Ominous:

HLV of Whole Life with disability waiver of premium  (HLV = Human Life Value)

Disability with MAXIMUM coverage
Long Term Care with Cash Indemnity Rider
Fixed or EIA
Municipal bond funds
 
So, you basically have no securities licenses, so you'd completely disregard the client's investment needs, simply because you have no capacity to service them?  Then substitute a product you CAN use, for a product that SHOULD be used? 
 
First 3 choices, no problem.
 
Why would someone in his mid-40's need a fixed annuity...besides the fact that you could probably steer him into one by being less than fully honest?
 
Do you routinely recommend to your 40 y/o clients, that are 20+ years away from retirement, that they don't need any equity exposure at all?  I'm sure the strategy you listed will keep up with inflation marvelously.
 
The guy can sock away $20 - $30k a month, with proper savings will have 6 figures in savings this year - and you are running basically a fixed income only portfolio for him (at age 40ish, mind you), and you are going to have him to it exclusively with muni bond mutual funds?
 
BESIDES the fact, that we don't have enough information about this person to make a real recommendation.
 
PS - B&H, he's eligible for a tax deductible IRA contribution, since he doesn't have one at work.  And maybe eligible for 2, if he has a spouse.  I know it's not much, but in a 30%+ tax bracket, every little bit helps.
 
Too many jack-of-all-trades going on in this business, case in point. 
 
 
 
Ice, even though your response was directed at Onimous, I have an idea why he's thinking this way:
 

Fixed Annuity - certainly it's not necessary, but with this client going into business for himself next year, is there a reason you would saddle him with the additional risk that equities would give?  I mean, we all know most businesses fail within the first couple of years, so having some guarantees may not be such a bad thing.  One of the downsides is that it would be fairly illiquid.  He's starting a new business, cash flow will be critical. 
Muni Fund - why wouldn't you want to offer a high income earner some tax-free investments?  Plus, they're liquid in case he needs additional capital for the new business.

IRAs for the sake of a tax-deduction is fairly dubious advice.  We're in a very low income tax environment.  President Obama is going to raise taxes on this very type of client.  Why defer at 30% when there is a very good chance he'll retire in a higher tax-bracket?  If we were at 90% taxes, I would jam as much as I could in QPs, IRAs, etc.  But now?  Makes no sense to me.


And FWIW, I'm fairly certain Ominous has his securities licenses.
Mar 29, 2009 4:37 pm

I'd be real careful about any non qualified annuity recommendation without knowing whether the guy cares about leaving money behind at death. 

Mar 29, 2009 4:46 pm
buyandhold:

Client is mid-40s, very little savings but just starting to make serious money. Can invest 20 or maybe even 30k per month. Not qualified money; his company doesn't have a retirement plan. He is in international sales. Probably striking out on his own next year to form his own company and we can look at a defined benefit plan then. This is retirement horizon timeline, probably 15 years out. Taxes now a huge issue.
What would you show him?

 
Without enough information, this is what I would recommend:
 
1)Term insurance:  as much as he can easily afford based upon current or future need (should be convertible to a quality WL product)
2)Disability coverage: as much as he can get
3)High interest debt: aggressively get rid of it
4)Health insurance: probably has it through work
5)Savings: he may need a couple years worth instead of the typical 3-6 months (Without enough savings a few bad months can derail what otherwise could be a great business.)
 
What's interesting about this, or more accurately, what is boring about this is that this is the exact same recommendation that I have for everyone.  Until someone has those 5 things, there is nothing else that they should be doing with new money.
 
Mar 29, 2009 5:38 pm

Right now he's got a million in term insurance, convertible to permanant. Got him into that a year ago. .... He is maxing two Trad IRAs. That was the second thing we did.
Disability -- haven't talked to him about that yet. LIRPs are outside my experience at this point. As far as insurance, I'm open to finding an independant agent who can help in cases like this.
Annuities? I think he's close to the age where a variable annuity with guaranteed income base stepups is worth considering. I don't like the longterm tax implications of the annuity, though, and the impact of the fees over time. At any rate, he didn't like the idea of tieing up his money.
Right now he's doing 5k a month, 3k into a money market for savings, the rest into straight mutual funds.
I like the muni idea -- bonds or funds -- and investing the interest into a stock asset allocation fund or a basket of dividend paying stocks. I believe dividend paying stocks give you some tax advantages, assuming you pick the right ones, and assuming the tax rates don't go up.
It's an interesting case because he's one of those guys who never made any money, but then he got serious about working hard, established some business relationships in China and his income has just exploded.




Mar 29, 2009 7:12 pm

I love how simple my business is. 

Mar 29, 2009 7:13 pm

Anon - good call on the 2-3 years liquid for start-up business purposes.  The business I see today who are thriving are the ones who stayed liquid instead of reinvesting 100% of their profits.  I would also add that he should sit down with an estate planning attorney to draft or update his will and trusts.

 
Buyandhold - Good start with $1mm of convertable term.  I would look into applying for more.  Someone of his age can get 15-20x his income from an insurance company that offers a suite of permanent products (UL, GUL, par WL).  I'm not thinking of this for LIRP purposes, but for income replacement purposes for his spouse and/or a buy-sell if he takes on a partner.  Although, depending on how he structures his business, an insurance-based retirement plan like a 412(i) might be an option.  I wouldn't worry about it at this point.  The corporate retirement plan should be way down the list of priorities right now.  Disability insurance is critical and must be taken care of, like, yesterday.  All of his business goals and savings goals are based on his ability to make money.  Take that away, and this conversation is pointless.
 
Ice - he could use individual bonds if he so chooses, my concern is individual bond selection.  I'm not a money manager, so I don't have the insight a manager would have.  If managing the portfolio is your thing, that's cool.  I see your point of using IRAs for tax-deferral of equity positions, but I disagree with your tax assesment.  History shows us that there is a significant chance he'll be in a higher tax bracket in retirement.  For him, the contribution will be a real small portion of his overall savings, so ultimately the tax issue may be an insignifiant point.  But I would be pretty pissed if I deferred at 35%, only to have to withdraw at 90%. 
Mar 29, 2009 7:15 pm
Blitzkrieg Bop:

I love how simple my business is. 

 
Me too.  Getting multiple apps in one appointment is pretty simple once you know what you're doing.
Mar 29, 2009 7:30 pm
anonymous:

I'd be real careful about any non qualified annuity recommendation without knowing whether the guy cares about leaving money behind at death. 

 
If you have big chunk of permanent life insurance as part of the plan, this is a moot point.  Single life annuitization is a much more viable strategy once this happens.  The permanent DB replaces the income stream once the client dies, tax-free.
Mar 29, 2009 8:08 pm
iceco1d:
Ominous:

HLV of Whole Life with disability waiver of premium  (HLV = Human Life Value)

Disability with MAXIMUM coverage
Long Term Care with Cash Indemnity Rider
Fixed or EIA
Municipal bond funds
 
So, you basically have no securities licenses, so you'd completely disregard the client's investment needs, simply because you have no capacity to service them?  Then substitute a product you CAN use, for a product that SHOULD be used? 
 
First 3 choices, no problem.
 
Why would someone in his mid-40's need a fixed annuity...besides the fact that you could probably steer him into one by being less than fully honest?
 
Do you routinely recommend to your 40 y/o clients, that are 20+ years away from retirement, that they don't need any equity exposure at all?  I'm sure the strategy you listed will keep up with inflation marvelously.
 
The guy can sock away $20 - $30k a month, with proper savings will have 6 figures in savings this year - and you are running basically a fixed income only portfolio for him (at age 40ish, mind you), and you are going to have him to it exclusively with muni bond mutual funds?
 
BESIDES the fact, that we don't have enough information about this person to make a real recommendation.
 
PS - B&H, he's eligible for a tax deductible IRA contribution, since he doesn't have one at work.  And maybe eligible for 2, if he has a spouse.  I know it's not much, but in a 30%+ tax bracket, every little bit helps.
 
Too many jack-of-all-trades going on in this business, case in point. 
 
 
 
I have my 7 & 66.  I have a few designations too.
 
Here's why I recommended the Fixed Annuity or EIA:
 - You NEVER risk your SAVINGS money that you earned through your profession.
 
This is a different philosophy that I don't expect anyone (everyone) on this board to agree with me on.
 
You can use the EARNINGS from your savings to purchase investment vehicles.
 
Remember, he is STARTING OUT LATE for his savings.  He would need time to get accustomed to the volatility of investments - particularly for the next few years.
 
Muni's?  Yes, I can sell them.  They make the most sense right now - for capital appreciation as well as income.
 
Variable annuities?  Well, I won't be recommending them again for a long time.  I liked the living benefit riders, but the institutions backing them aren't so solvent anymore and they NEVER anticipated a market correction of 50% in the actuarial calculations.
 
So, if you can't have a guarantee with a variable annuity, why bother with the volatility of an equity portfolio just for the tax deferral?
 
Yes, there are other options, but in MY planning, I plan for safety, security and guarantees FIRST.  THEN we can find ways to enhance their situation with investments.
 
Just because you only get paid on securities doesn't mean that everyone should have them.  They are the higher-risk method of financial advising - higher risk for the client AND the advior recommending them.
Mar 29, 2009 8:12 pm
Blitzkrieg Bop:

Index annuity. 



 
From what I understand... this is ALL you will recommend as you aren't with a FINRA firm anymore.
Mar 29, 2009 8:33 pm
deekay:
anonymous:

I'd be real careful about any non qualified annuity recommendation without knowing whether the guy cares about leaving money behind at death. 

 
If you have big chunk of permanent life insurance as part of the plan, this is a moot point.  Single life annuitization is a much more viable strategy once this happens.  The permanent DB replaces the income stream once the client dies, tax-free.
 
Deekay, we may be coming after this from a different angle.  I'm obviously a big fan of permanent insurance.   Joe dies at age 70.  He leaves his wife a $500,000 life insurance policy and $500,000 in stocks that were purchased for 100,000.    Sam dies at age 70.  He leaves his wife a $500,000 life insurance policy and $500,000 in a variable annuity that was purchased for $100,000.  After tax, Joe is leaving $1,000,000 for his wife.  Sam is leaving $850,000 for his wife. 
 
A NQ annuity is guaranteed to be taxed if it makes money.  Mutual funds/stocks have the possibility of never being taxed or only partially being taxed.
Mar 29, 2009 8:46 pm

You're right - I'm approaching this from a cash flow standpoint.  In other words, how much can the client spend during his life while leaving the largest net legacy? Certainly, the step up of basis is a huge benefit.  However, who knows what the rules will be in the future, let alone tomorrow?  As we speak, our President wants to get rid of this and many other estate planning techniques that allow our clients to keep more of their money.  The larger the permanent LI policy is, the more viable annuitization becomes.  The smaller (or non-existent) the policy, the harder the assets need to work in order to acheive income and providing a legacy.  In the latter senario, step up of basis becomes infinitely more important due to the tax issue.

Mar 29, 2009 8:52 pm

Deekay, you are hitting upon a huge part of the reason why I sell Whole life insurance.  A permanent death benefit allows someone to spend more of their money while they are living.  This is true with or without annuitization.    However, it certainly makes annuitization a much better option since it can be done with a single life instead of a joint life.

 
Owning a significant permanent insurance policy often means that a client can spend 20-40% more in retirement.